On 19 May 2019, the Swiss corporate tax reform package TRAF (Tax Reform and AHV Financing) was approved by referendum. The reform will enter into force on 1 January 2020 and is mainly aimed at replacing preferential tax regimes, such as the holding company, mixed company or finance branch status, with new tax incentives as of 2020. TRAF will notably introduce step-up mechanisms applicable to most companies that currently apply a preferential tax regime as well as incentives for income from patents and R&D activities. Separately, most cantons have announced significant tax rate reductions as of 2020, resulting in a typical range of effective tax rates of 12-15%. Swiss businesses should assess opportunities to benefit from the reform.
Overview of the approved package
TRAF obtained an approval rate of 66%. It will replace current tax regimes, such as the holding, principal, mixed company and finance branch regimes, with new tax incentives in line with international standards.
The below summary outlines the various measures:Measure Tax reform package Patent Box • 90% reduction of income on patents (excluding software)
• Allows outsourcing to related parties in Switzerland or third parties (anywhere) R&D Super-deduction • 50% super-deduction on R&D (salary) expenses
• Includes expenses for outsourced activities Step-up in basis in general • Step-up upon migration or transfer of business operations/functions to Switzerland Step-up in basis for regimes • Transition mechanism for companies if an applicable tax regime ends
• Two different models available: Depreciation Model (depreciation on built-in gains/goodwill) and Separate Rate (taxation of income at a separate, reduced rate) Notional interest deduction • Deduction on "excess equity financing” up to an arm's length interest rate for intra-group financing operations, resulting in an effective tax rate of approx. 11% (canton of Zurich only) Capital tax relief • Capital tax relief on qualifying share investments of at least 10%, patents and intra-group loans Base-erosion limitation • Deductions under the above measures (except general step-up regime) cannot exceed 70% of total income Abolishing preferential tax regimes • Preferential tax regimes abolished Foreign withholding tax credit • Swiss branches of non-resident entities will benefit from a foreign withholding tax credit (subject to certain conditions
Future effective tax rates without reliance on regimes
TRAF is subject to cantonal implementation. In addition, most cantons have announced to also lower effective tax rates as of 1 January 2020. Based on current announcements, the overall effective tax rate (federal and cantonal level) in most Swiss cantons will be in the range of 12% to 15% without the requirement to apply any specific tax regimes or incentives.
Other aspects of the reform
TRAF introduces small changes to other areas of the tax system as well, e.g., with respect to the preferential taxation of dividends for Swiss tax resident individuals (minimum tax basis of 70% on federal and 50% on cantonal level) and to the income and withholding tax treatment of qualifying capital reserves (additional paid-in capital) for Swiss listed companies.
Action points until the end of the year 2019
The new rules will enter into force on 1 January 2020. Also taking into account tax developments in other jurisdictions, priority action points include the following:
- Transition from old tax regimes: TRAF introduces a new transition mechanism when phasing out of a current tax regime. Under current rules, taxpayers may benefit from a tax effective depreciation on built-in gains/goodwill (Depreciation Model) whereas TRAF now introduces the possibility to tax such built-in gains/goodwill separately at a reduced rate (Separate Rate Model). The tax impact varies and needs to be analyzed on a case-by-case basis. Taxpayers are advised to review their position and analyze what is the most beneficial approach.
- Relocation of activities/functions: Many groups have started to relocate functions to Switzerland in view of the future low tax rates without reliance on regimes. The possible additional benefit of a step-up in basis upon migration could result in higher (tax deductible) amortization expenses that may further enhance the tax efficiency. In any event, international tax developments seem to indicate a shift towards a tax rate-related approach, notably with respect to financing activities.
- Taking into account the interaction with foreign rules on controlled foreign companies (CFC) and participation exemptions: Multinational groups should assess whether opting for certain incentives introduced by the new Swiss reform package or their general set-up may result in the Swiss entity falling in the scope of foreign CFC rules or no longer qualifying for the participation exemption at the level of the parent entity. Taxpayers are advised to combine their review of their Swiss tax position with analyzing their overall set-up.
Loyens & Loeff recommends its clients to assess opportunities for restructurings further to the adoption of TRAF, starting from the above topics.